The Efficiency Fallacy

August 09, 2011
8:33 pm

Members of Congress say it. Administration officials say it. People regarded as healthcare and economic experts say it. Repeatedly.

Medicare is significantly more efficient in its operations than private health insurance. It’s said with such frequency that it absolutely has to be true, right?

Wrong.

This is an argument used on a host of issues, from health plan regulation to Medicare prescription drug coverage to whether Medicare’s future should include some element of private plan competition. People who should, and likely do, know better continue to make the point that Medicare can do its job with far less administrative costs than private plans do.

On today’s Health Affairs blog, there’s a post by John Goodman and Thomas Saving that dismantles this argument. It’s well worth reading and keeping handy the next time a politician or television talking head makes this apples-to-oranges argument about Medicare and private insurance.

Here are some of their key points:

• Private plans incur the costs not only of marketing and selling insurance, but also of collecting premiums. The Centers for Medicare and Medicaid Services (CMS) doesn’t collect taxes. That falls under the IRS’s administrative expenses.

• Many of Medicare’s administrative burdens are shifted to the healthcare providers who treat Medicare patients.

• In raw numbers, studies have shown that Medicare’s administrative expenses per enrollee are actually higher than private insurance. As a percentage of total budget, though, Medicare administrative costs look smaller because seniors utilize more healthcare services than younger citizens.

• What some call efficiency is actually Medicare’s price controls on provider costs. Medicare’s future costs are projected to grow more slowly than private healthcare because of the expected suppression of provider reimbursements. This is the kind of “efficiency” that results in reduced healthcare access for seniors.

There’s considerably more substance in the Goodman-Saving post than I’ve written here and I urge you to check it out. As we consider Medicare’s future, it’s critical that we honestly debate the program’s merits and its shortcomings and not perpetuate misconceptions to advance political goals.

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The Efficiency Fallacy

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